04 July 2024
Airline Insurance Market Update Q2 2024
As we reach the mid-point of the year, despite ongoing challenges, excess capacity and increased competition are driving rate softening, and a more competitive pricing environment has emerged much to the benefit of airline insurance buyers.
Capacity remains a key influence on market dynamics
The results of Q2 continue to present a more favourable market for buyers and capacity remains a key driver in this. Higher rates in recent years coupled with lower average claims have attracted capacity back into the market generating increased competition and pursuit of market share to the detriment of underwriting discipline. In general, the majority of insurers are now actively seeking to write more premium volume. However, for long-term players, this pursuit of premium is driven by profitability pressures and squeezed profit margins exacerbated by increased retentions and a growing divergence between the insurance and reinsurance market pricing. Insurer management will be closely monitoring rating adequacy in the coming months and may start to raise questions as to the best place to allocate capital going forward.
Regardless, current factors have tipped the supply and demand dynamics firmly in favour of buyers again, and for now, the increased competition is resulting in more positive renewal outcomes. We expect this ‘buyer’s market’ will continue in the short term, but, several very major matters remain unresolved, not least potential lessor claims, which may negatively influence future capacity and underwriting sentiment once the market has greater clarity.
As a side note to capacity, we continue to witness significant personnel movement again amongst insurers. In recent months many experienced underwriters and product heads have switched companies, leading to some challenges. Some of these individuals are just getting settled in, others are on gardening leave and some insurers are actively recruiting to restaff their depleted teams. During this transition period, there are, inevitably, questions about future underwriting plans and what this means but, at this point, it is premature to say what impact (if any) this recent activity will have on those markets concerned.
All risk rating trends
With the conclusion of the second quarter, market uncertainty persists, and challenges remain, but for now, All Risks rating trends are favourable for airline insurance buyers.
The first half of the year witnesses very few major airline renewals, so we often look to July (which produces more premium than the first six months of the year combined) for a true indication of what is happening in the aviation insurance market. At the time of writing this article, with several major July renewals now concluded, we can report that the downward rating trend continues and indeed appears to have gathered momentum with further rate softening evident in the results.
Capacity is again a key driver in this, and whilst results will manifest differently for each buyer depending on risk profile and existing programme structures, we are now seeing a return to positive differentiation from insurers in contrast to the market-wide pricing approach of prior years. In the current environment, airline risks with good loss ratios and increasing exposures will attract the most positive reception from insurers. In contrast, those airlines with higher loss ratios will face greater scrutiny, albeit there now exists more room to negotiate where airlines can demonstrate positive risk management strategies and safety credentials. Positive negotiations can certainly be had, but buyers must keep in mind that while some capacity may be more willing to make greater concessions on pricing, with potential turbulence on the horizon, the value of long-term relationships, insurer financial strength and past claims performance are important elements that should not be so easily overlooked.
In the absence of any significant shocks to the market, the present focus on profitability and the fight for premium/market share should maintain competition, particularly as we approach the later months of the year, insurers' key income period. Having a well-prepared renewal strategy remains critical to achieving the best renewal outcomes, and with uncertainty still surrounding future trends, prudent clients should consider the merit of early renewal negotiations and ‘locking in’ competitive terms early to take advantage of conditions while they remain favourable.
The downward rating trend continues and indeed appears to have gathered momentum with further rate softening evident in the results.
Losses
2024 got off to a somewhat poor start with some notable large claims. Fortunately, as the second quarter concludes, we can report a slightly better experience albeit, as is typical in the airline industry, we have continued to observe a steady flow of airline incidents, including various runway mishaps, bird strikes, and ground incidents.
Several runway excursions were recorded, some of which are expected to result in constructive total losses due to the extent of damage sustained, but the age and type of aircraft involved means hull claims will be of relatively minor value. However, it must be noted, that similar to Q1, several incidents were ‘close calls’ and could very easily have ended up considerably larger claims had passenger fatalities occurred.
In June, we witnessed another B737 MAX incident, when a Korean Air B737 MAX 8 aircraft experienced a pressurisation system fault, descending rapidly before safely landing in Seoul. 13 passengers were reportedly taken to hospital, but again thankfully, none were seriously injured. An investigation is underway, and all parties will be eagerly awaiting the findings, given recent issues.
One of the most high-profile incidents of the second quarter involved a Singapore Airlines flight operating from London Heathrow to Singapore, which encountered severe and sudden turbulence en route. The B777 aircraft diverted to Bangkok and landed safely but tragically one passenger died and, multiple other occupants suffered injuries.
This is one of several turbulence-related incidents to make headlines in recent times, indeed on 1 July another severe case of turbulence was reported on an Air Europa Boeing 787 Dreamliner aircraft travelling from Spain to Uruguay. More than two dozen passengers were reported to be injured, and the plane eventually diverted to Brazil due to the incident.
Turbulence-related airline accidents are common and are considered one of the most unpredictable all-weather phenomena. In fact, according to a 2021 study by the US National Transportation Safety Board (NTSB), from 2009 through 2018, turbulence accounted for more than a third of all reported airline accidents. Modern aircraft are equipped with sophisticated weather radar systems to navigate around areas of turbulence, but some (e.g. clear air turbulence) can be harder to spot. Research shows that clear air turbulence is becoming more common, and is projected to intensify in response to future climate change.
With turbulence and other such weather-related incidents growing in frequency, it is more important than ever that airlines ensure they have effective Emergency Response & Management Programmes (ERP) in place. While unexpected events can and do occur within the aviation industry, the ultimate effects on passengers, family members, employees, shareholders, and the corporation itself, depend on the amount of preparation given to emergency response measures. At Gallagher, our in-house Safety and Operational Aviation Risk (SOAR) team has extensive experience in creating and implementing emergency management plans and programs and can assist you with a variety of solutions tailored to your safety and risk management requirements.
Hull war and excess war third-party
Recent losses and an increasingly volatile geo-political landscape are keeping pressure on this class of business. In Q1, we reported that we were seeing a broader range of results, but rates were still trending upward, however, as the second quarter concludes we are now seeing some additional price softening. In the Hull War segment, rates are now flatting out with ‘as-before’ results and single-digit reductions achievable. In contrast, AVN52E pricing is still trending upwards at circa +10% but this segment has stabilised significantly in recent months.
While conditions can’t yet be truly described as a ‘buyer’s market’ (like the All Risks) with class underwriters maintaining some element of discipline, most airlines should experience more positive renewal negotiations, in the absence of any new global/industry events and or major losses, further price softening looks plausible. Results will continue to manifest differently based on each client’s specifics. And so, transparency from clients on how they manage risk is crucial to educating underwriters on your risk and achieving the best renewal outcomes.
Future Outlook
- Continued uncertainty, challenges and added renewal complexities.
- But, absent any new developments, losses or significant shocks to the market, our view in the short-term is for a continuation of current trends into Q3 2024.
- Market conditions are in the buyer’s favour (at the moment) and most clients should experience more positive renewal outcomes.
- Several very major matters remain unresolved, not least potential lessor claims, which may negatively impact future capacity and underwriting sentiment once the market has greater clarity.
- Market dynamics are notoriously reactive, and therefore we retain a cautious outlook for the longer term recognising things can change quickly.
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